Is Canada Turning a Corner on Innovation?

Sheila Rao
Manager, How Canada Performs Program
Forecasting and Analysis

Canada’s innovation performance has been weak for decades, earning “D” grades year after year on The Conference Board of Canada’s How Canada Performs: Report Card on Innovation. Such poor performance is becoming a greater risk for Canada as innovation is becoming an increasingly important driver of productivity, income, and standards of living among advanced economies.1 On September 3, the Conference Board will release the results of the latest report card, which examines not only how Canada and international peers fare on innovation, but how the provinces perform as well.

Including the provinces prompted some changes in the indicators used to measure innovation, given the state of available and comparable data. Although some indicators have changed, this year’s report card will nevertheless provide a good snapshot of innovation performance in Canada and the provinces, as well as how performance has changed over time. In fact, there has been significant movement on key indicators, raising questions about whether Canada’s overall performance has changed. Does Canada still earn a “D” on innovation, or are we turning a corner?

Venture Capital Boost and a Healthy Dose of Ambition

Consider venture capital investment. In recent years, venture capital investment in Canada has more than doubled—from nearly $1 billion (0.07 per cent of GDP) in 2009 to over $2.3 billion (0.12 per cent of GDP) in 2014. Meanwhile, nearly all of Canada’s global peers have experienced declines in venture capital investment as a percentage of GDP. While there is some volatility in global venture capital rankings, by 2013 Canada nevertheless climbed from third-worst to second-best relative to 15 other peer countries.

This means that more start-ups are receiving the risk capital they need to invest in further research and development (R&D), manufacturing, and marketing at a critical point in their development. Moreover, as the number of deals has increased alongside the amount invested, more firms are also gaining access to the managerial expertise, entrepreneurial experience, industry knowledge, and networks that are essential to innovation and commercialization.

On a new indicator in the upcoming report card, “entrepreneurial ambition” (a measure of the share of the working-age population reporting early-stage entrepreneurial activity), Canada has a very strong showing, earning an “A” and ranking third among international peers. The early-stage activity, along with the surge in venture capital, suggests that a healthier start-up and entrepreneurial environment may be emerging in Canada while peers in Europe are struggling on this front.

Persistent Weakness in Business Enterprise R&D Spending

Although optimism in Canada’s start-up and venture capital communities may be at an all time high, a persistent weakness in Canada’s innovation ecosystem may be getting even worse. Already a laggard on business enterprise R&D (BERD) spending, Canada has dropped from 15th to last place among 16 international peers. BERD spending as a share of GDP in Canada is just 0.82 per cent—half the OECD average and the lowest level in over two decades. At the same time, most of Canada’s peers have increased BERD spending in recent years, widening an already large gap.

Mixed Messages on ICT Investment

Finally, consider Canada’s track record on information and communications technology (ICT) investment—a key way firms innovate to improve efficiency and, in turn, increase productivity in the economy as a whole. Canada’s ICT investment as a share of GDP has persistently lagged international peers—especially the United States—and has been trending downward over the past few years. The weak showing on ICT investment and declining levels of BERD suggest that Canadian firms’ commitment to innovation, which is already low, may be waning.

Overall Performance and Provincial Variation

There are reasons for both optimism and pessimism about Canada’s innovation performance. While venture capital investment has improved dramatically, and there is a healthy entrepreneurial spirit in Canada, BERD spending and ICT investment—two key innovation drivers—have declined yet again.

Notably, the Conference Board’s forthcoming How Canada Performs analysis compares the innovation performance of individual provinces with 16 advanced peer countries for the first time. So, in addition to showing how Canada performs overall, the report card will reveal very different stories at the provincial level. While some provinces are at the back of the class, others are performing near the global frontier of innovation excellence. The report card should advance discussion of how capacity and conditions can be developed to facilitate innovation strength in parts of the country.

Join us on September 3 when we release the results of the international and provincial rankings on innovation. On September 25, report authors Daniel Munro and Sheila Rao will dig deeper into the results and answer questions about the Report Card on Innovation during a live webinar.

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